Using a home equity line of credit, David Casey and his wife, Joyce, made some much-needed improvements around their house. New carpet. Updated plumbing. But the credit line's interest kept jumping, pushing their monthly payment to nearly $1,000 from $600.
A $239,000 reverse mortgage from Generation Mortgage Co. rescued the retired couple from the adjustable-rate credit line and provided enough money to pay off the original mortgage with some left over.
Typically used to finance retirement or pay unexpected medical bills, the reverse mortgage now is helping some seniors escape tight spots created by risky mortgages and home equity lines of credit.
Now Mr. Casey has a new roof, a new Cadillac, and no mortgage debt.
The 71-year-old is even going back to school to finish his bachelor's degree.
"It's nice to have a little jingle in the jeans," he said, referring to the money he saves each month by not shelling out a loan payment.
Unlike a traditional mortgage, the reverse mortgage allows homeowners over age 62 to take money out of their home to help fund their retirement or obtain cash.
But instead of paying back a mortgage, the lender pays part of the equity in the home to the senior in cash, either in a lump sum, regular payments or some combination. The lender takes some of the equity as payment. The contract ends once the home is sold, usually after the homeowner sells the home or dies.
Some experts caution that if a senior elects to receive monthly payments over a fixed period of time, however, the homeowner could outlive the payments and still be liable for property taxes, upkeep of the property and other expenses.
The reverse mortgage business is just a sliver of the overall mortgage industry, even though the concept has been around for nearly two decades. Just over 300,000 reverse mortgages have been originated, representing less than 1 percent penetration, according to the National Reverse Mortgage Lenders Association.
But recent statistics show the industry is growing. Issuance of these loans rose to 85,639 in 2006, up from 48,493 the year before, according to data compiled by the trade group from federal government statistics.
Several large financial institutions are getting into the business through acquisitions. In the past four months, Genworth Financial Inc. agreed to buy Liberty Reverse Mortgage Inc. and Bank of America Corp. acquired the reverse-mortgage business of Seattle Mortgage Co.
By chance, the reverse mortgage has emerged as a salve for a more immediate crisis: seniors stuck in unmanageable payments following the housing boom.
"Very often the reverse mortgage is an antidote to a burdensome mortgage that seniors have gotten themselves into," said Peter Ball, the president of the National Reverse Mortgage Lenders Association. "As more people work through loans that are resetting to higher payments, this will become that much more critical of a tool."